For those who are age 62 or older, a reverse mortgage is probably a tempting and seemingly lucrative opportunity to help you meet your financial goals and needs. There are, however, many pitfalls that come along with reverse mortgages. While not everyone knows and understands these drawbacks, if you go into a reverse mortgage blind you could be in for a world of hurt. How can these pitfalls be avoided, and in what circumstances is a reverse mortgage appropriate?
One of the major downsides of a reverse mortgage is the fact that you are essentially selling equity of your home for money. This obviously means that you will no longer have equity in your home to do what you want with. For example, you may not pass down your estate in your last will and testament as you do not legally own it anymore.
Your heirs may have the first shot at paying off the loans and keeping the house, though. You should realize that this does not mean that you have to move out of your house; on the contrary, the estate that you are taking a reverse mortgage out in must be your primary residence.
Perhaps more important are the fees and charges that you may incur with your reverse mortgage. Potential fees include upfront mortgage insurance, an origination fee, and other traditional closing costs. On top of these, you must pay interest on the money you are loaned. These fees can quickly add up, especially for those in financial trouble who are seeking a way out.
Are Reverse Mortgages for Me?
How can you tell if you can handle the financial burdens of a reverse mortgage? It is difficult to estimate this on your own, so it is recommended you talk to a professional and get advice as to if you can afford (in the short term) a reverse mortgage.
First, you need to shop around. Getting quotes from a variety of different lenders will allow you to get the best deal possible and ensure that you stay afloat financially. What, though, should you look for? If you are struggling for money in the short term, then you may need to look for low upfront costs. Realize, however, that low upfront costs generally come with higher interest rates and a lower payout in the longer term.
This classic tradeoff can be used to your advantage if you let it; those who can afford larger upfront fees should, by all means, pay them to utilize the lower interest rates and larger payouts. If you find yourself squeezing money in the initial stage, you may want to ask yourself if you can afford a reverse mortgage to begin with.
That being said, reverse mortgages are not only last resorts. In fact, people who run into trouble with reverse mortgages most frequently are those who use them as last resorts and pay low upfront fees. Those who carefully plan and don’t skimp on the coverage can, and should, use a reverse mortgage as a solid part of their retirement plan.